Can Competition Between Regulated and Unregulated Institutions Affect Financial Stability?
By Eric Monnet | Posted on 2 July 2021
Post type: Paper
In the paper “The Real Effects of Bank Runs. Evidence from the French Great Depression (1930-1931)” we study how competition between regulated and unregulated institutions can trigger financial instability and how a ill-designed lender-of-last-resort policy and political support for only the most regulated institutions can reinforce a crisis. This key feature of the French Great Depression (1930-1931) then enables us to investigate the causal impact of bank runs by exploiting exogenous geographical variations in the withdrawals of bank deposits. Since the 19th century, unregulated commercial banks coexisted with government-backed saving institutions (Caisses d’épargne). During the crisis, depositors who had an account in Caisses d’épargne were more likely to withdraw from banks. Pre-crisis density of Caisses d’épargne accounts was unrelated to economic and bank characteristics. Using this variable as an instrument, we find that a 1% decrease in bank branches reduced aggregate income by 1%. Our identification highlights how a shift of deposits towards safer institutions can affect financial fragility. It holds lessons for current financial regulation and the design of central bank digital currency (CBDC).
Co-Author(s): Angelo Riva and Stefano Ungaro